A consumption-based measure of the monetary rewards to entrepreneurship
| Date | 14 April 2014 |
| Published date | 14 April 2014 |
| DOI | https://doi.org/10.1108/JEPP-03-2012-0020 |
| Pages | 49-71 |
| Author | Dmitriy Krichevskiy |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
A consumption-based measure
of the monetary rewards
to entrepreneurship
Dmitriy Krichevskiy
Department of Business, Elizabethtown College, Elizabethtown,
Pennsylvania, USA
Abstract
Purpose – Recent findings by Hamilton (Journal of Political Economy,2000)suggestthatthe
self-employed do not receive a monetary premium for the risk and uncertainty associated with business
ownership.The purpose of thispaper is to show that incomeunderreportingby entrepreneurscan explain
the lack of evidence for monetary premia. Using a large national data set (Panel Study of Income
Dynamics (PSID)), the author first document evidences of underreporting, and then proceed to make
alternative comparisons using measures of consumption.The author finds that the self-employedenjoy
large earnings premiathat are reflected in their consumption.
Design/methodology/approach – Using PSID the author creates and analyzes a household level
data set comparing monetary rewards of self-employment to those of wage work. The author employs
previous findings about entrepreneurial saving behavior to show, via quintile regression analysis,
consumption rewards to entrepreneurship, and compare those rewards to income rewards.
Findings – The author finds self-employed enjoying significant consumption premia, over the income
premia, throughout the income distribution. Contrary to previous claims (e.g. see Hamilton, 2000) the
author finds that self-employment is a financially rewarding undertaking. Due to different income
reporting metrics and tax exemption str ucture entrepreneurs enjoy even larger monetary rewards
when compared to wage workers along consumption axis. In light of these findings the paper proposes
consumption, rather than income metrics, to be applied when quantifying rewards to self-employment.
Research limitations/implications – Household level of analysis is a major drawback in using this
approach. This is an outcome of consumption data collected and reported on household rather than
individual income. Because of this limitation transitions into and out of self-employment cannot be
separated from household changes, i.e., divorces and marriages. However, divorces and marriages are
assumed to not have systematic component favoring wage workers or self-employed.
Practical implications – Significant resources are allocated toward supporting entrepreneur.
Small business administration, congress, state agencies, and community development cor porations
contentiously outline both risks associated with failure rates and low rewards to self-employment.
This paper provides policymakers with better tools for assessment of tr ue monetary rewards.
Better assessment of true rewards, especially contrasting cor porations vs individual earnings in
self-employment should enable the policymakers to provide better support for the entrepreneur.
Social implications – Entrepreneur, in social light, is perceived as a much more successful
individual. This view differs w ith recent data. Previously overly naive positive esti mate of entrepreneur
has been attributed to the bias of survival. This paper provides additional support for social view of
entrepreneur by pointing to an overlooked, by the policymakers and most researchers, information
segment – consumption data. These additional benefits that have been well understood by the public can
now be substantiated for the policymakers.
Originality/value – This paper develops unique method for documenting monetary rewards to
entrepreneurship. Using information about entrepreneurial saving behavior this paper demonstrates
significant monetary premia, over reported income premia enjoyed by entrepreneurs. The premia is
documented throughout income distribution and is not an outcome of entrepreneurial superstars or
even average entrepreneur.
Keywords Entrepreneurs, Self-employment, Tax policy, Entrepreneurial action,
Entrepreneurial opportunity
Paper type Research p aper
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/2045-2101.htm
Received 23 March 2012
Revised 24 August 2012
Accepted 29 August 2012
Journal of Entrepreneurship and
Public Policy
Vol. 3 No.1, 2014
pp. 49-71
rEmeraldGroup Publishing Limited
2045-2101
DOI 10.1108/JEPP-03-2012-0020
49
Monetary
rewards to
entrepreneurship
1. Introduction
This paper examines the monetary returns to entrepreneurship. I compare rewards of
self-employment to those of wage employment. This is, of course, an exercise that has
been carried out many times before. However, previous studies have typically
overlooked a potentially important source of bias that arises from the propensity of
entrepreneurs to underreport their income. As a result, evidence that entrepreneurship
is not a monetarily rewarding undertaking, and that other nonmonetary rewards
must be important (Hamilton, 2000; Moskowitz and Vissing-Jorgensen, 2002), may be
misleading. In this paper I produce indirect evidence of underreporting of income in
survey data,and I provide alternativemeasures of monetary rewardsto entrepreneurship
based on consumption data. The paper also estimates the effects of previous business
ownership on current consumption. Contrary to some recent investigations, I find
entrepreneurship to be a financially rewarding activity.
Numerous obstacl es present themselves whe n measuring the earnings of
entrepreneurs. First, the distribution of income appears to have fat tails, suggesting
that OLS estimates are likely to be unreliable[1]. In this p aper, I employ a quintile
regression method, which is a better metric for contrasting earnings distributions
produced by two groups, such as wage workers and the self-employed (Hamilton,
2000). Second, because the returns to self-employment consist of salary and
accumulated business equity, the income of entrepreneurs is hard to define and track.
Business equity is hard to measure unless the researcher examines the entire lifespan
of a given firm, and even then, dissolution of a business only reveals its equity value at
that particular point in time. In other words, an entrepreneur could have received
more (or less) funds if she was to sell the business earlier. The issue is further
complicated by entrepreneurs who stay in business for periods beyond the boundaries
of any data collection survey. However, by tracking consumption instead of income, it
may be possible to capture the wealth effect by observing increased spending of the
entrepreneur. Additionally,lifestyle comparisons obtained from consumptio n measures
are likely to be more reliable because they do not rely on income, which, even if not
hidden, is computed differently from wage income due to different legal metrics and
reporting methods by entrepreneurs.
At the same time, some benefits of self-employment are very hard to measure,
regardless of the metric at hand. Much more serious complications arise if a researcher
attempts to measure less obvious business benefits, some of which inc lude use of
business assets for personal use, or claiming personal exp enditures as business
expenses. Nonmonetary benefits of wage employment, such as fringe benefits, are
much easier to measure because they appe ar as business costs on the employers’
books. The drawback associated with difficulty of measuring nonmonetary benefits of
self-employment is also better addressed through consumption comparisons: the
researcher can detect differences in particular consumption categories in whic h there is
no overlap with business expenditures – housing expenditures, vacations, money sp ent
on clothing, etc.
The consumption comparison approach carries significant benefits in assessing and
addressing both expense overstatements and income under reporting. By examining
expenditures in a number of discrete categories and subcategories, I can allocate
particular expenditures into business, individual consumptio n, or both categories,
thus facilitating better estimates of ear nings spent on personal consumption.
Overstatements of business expenditures, together with hiding of income by the self-
employed, comprise the underreporting gap. The under reporting gap is quite
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